How Samsung won and then lost the smartphone war

In November 2011, Samsung released the first of a series of ads
that would define the company for the next three years.

It started with a bunch of hipster-looking people waiting outside
a mock Apple Store for the next iPhone. As the hipsters tick down
the hours until they have the right to get Apple’s new iThing,
they spot others on the street using something better.

The phone, Samsung’s former flagship Galaxy S II, had a big
screen and a 4G wireless connection, two major features that were
missing from Apple’s new iPhone 4S. And unlike the iPhone, you
didn’t have to wait around to buy a Galaxy S II. You could get it
now. But you didn’t see
anyone lining up to buy a Samsung, or anything other than an
iPhone, in those days.

Things started to change with
the first “Next Big Thing” spot. Just like Apple poked fun at
Microsoft with its “I’m a Mac” campaign in the 2000s, Samsung’s
goal was to tap into the same strategy — a little guy taking
swings at the dominant player in the industry — and for a while
it worked.

By the end of 2012, Samsung's profits were up a whopping 76%,
fueled by the growth of the mobile division, which suddenly
became the most profitable part of Samsung. Samsung was the only
company other than Apple making a profit in mobile, and it seemed
to be closing in on Apple’s dominance, prompting The Wall Street
Journal to publish its famous “Has
Apple Lost Its Cool To Samsung?” headline in January 2013.

Samsung's Galaxy S II
commercial made fun of Apple fans waiting for the new
iPhone.Samsung

By the time the Galaxy S4
launched in March 2013, the anticipation surrounding Samsung’s
products could only be rivaled by Apple. It was officially a
two-horse race.

But it only took another year for things to come crashing down.
Profits tumbled in 2014, even during the normally lucrative
holiday season. Throughout the year, Samsung blamed increased
competition in mobile for the downturn.

Now, Samsung is gearing up for its most important smartphone
launch ever on March 1. The question is whether or not the Galaxy
S6 will be enough to help Samsung recover from its slump, or if
it will share the same fate as former kings of mobile like Nokia,
BlackBerry, and Motorola.

How did Samsung get so big so fast and how did it all go so
wrong?

Competition from new players like Xiaomi and a renewed Apple were
central to the decline, but corporate turmoil at Samsung,
including a rift between
the company's South Korean headquarters and its suddenly
successful US group, also played a major role.

The Samsung Galaxy S5 and the iPhone
5S.Will Wei, Business
Insider

The birth of “Galaxy”

As the post-iPhone smartphone era began in 2008 and 2009,
Samsung, along with many others, was hopelessly behind the curve.
It relied mostly on carriers to sell its smartphones, but even
then, there wasn’t any distinct branding to separate Samsung’s
devices from the slew of other generic phones on the shelf.
Depending on their carrier, consumers chose between iPhone,
BlackBerry, or whatever their carrier threw in for free with a
two-year contract.

By about 2009, Samsung decided it needed to come up with a new
brand for its upcoming line of flagship phones designed to run
Android, according to sources familiar with Samsung’s plans at
the time. Samsung had a revolutionary new screen technology
called Super AMOLED that it at first wanted to put in someone
else’s device, perhaps a phone built by a major wireless carrier
like Verizon. Samsung has always provided chips and displays for
other manufacturers, and it wanted to license its Super AMOLED
tech the same way.

Eventually, Samsung decided to make its own high-end smartphone
to compete with the iPhone, but it had no way to market it. The
“Samsung” name was synonymous with cheap flip phones and nice
TVs. It was never mentioned in the same breath as Apple,
BlackBerry, or Nokia. That could’ve set up the new device for
failure before it even launched. Plus, Samsung tested its brand
against Apple with consumers and learned it was barely
recognizable as far as smartphones go. It needed a change.

So Samsung created a luxury sub-brand for its Android phones
moving forward, the Lexus to its Toyota.

It chose Galaxy.

In March 2010, Samsung unveiled the Galaxy S, the first in what
would become its successful line of Android phones and tablets.
The Galaxy S had hardware specs that rivaled the iPhone but was
also heavily criticized for copying the iPhone’s software and
physical appearance. That didn’t seem to matter. There were
hundreds of carriers in the world that still didn’t offer the
iPhone, and AT&T still had an exclusive on the device in the
US.

Samsung made deals with wireless carriers to promote the Galaxy S
in stores when it launched that June. Even better, Samsung got
AT&T to agree to sell the Galaxy S, even though it was sure
to be a strong rival for the iPhone.

It wasn't that long ago HTC was king of
Android.AP

Two-horse race

Even with the successful launch of the Galaxy S, Samsung was
still behind Android rivals like HTC. Both companies were making
decent phones, but neither gave customers a good reason to choose
one over the other. As Samsung prepared to launch its successor
to the Galaxy S, the Galaxy S II, in the spring of 2011, it also
formulated a new strategy to market the device, at least in the
US.

According to sources familiar with the company’s thinking at the
time, Samsung’s Korean executives wanted Galaxy to be the
number-one smartphone brand within five years. (It ranked fifth
in consumer surveys at the time.)

Under the US head of marketing Todd Pendleton and his team,
Samsung was able to do it in 18 months.

At first, the Korean leadership at Samsung wanted to pick off the
competition one at a time, starting with HTC, then Motorola, then
BlackBerry, and finally, Apple. But the US team decided on a
different approach. It was going to start a war with Apple,
kicking off the smartphone world’s equivalent of Coke versus
Pepsi.

It was a gamble. By attacking Apple directly, Samsung risked
looking petty and desperate.

But “The Next Big Thing” campaign, developed by the ad agency 72
And Sunny, was a massive hit. For the first time since the launch
of the iPhone, someone had created the believable perception that
there was something better out there.

Apple CEO Tim
Cook.Getty Images/Chip
Somodevilla

Out-innovating Apple

With the launch of “The Next Big Thing” campaign came a lot of
glowing press coverage for Samsung. There was a company out there
willing to take swipes at the king of smartphones, and consumers
were responding.

And for all the criticism Samsung got along the way for copying
Apple, it did prove that the world was hungry for something the
iPhone didn’t have yet — smartphones with giant screens.

In the fall of 2011, Samsung announced the Galaxy Note, the first
so-called phablet with a 5.3-inch display. (The iPhone 4S only
had a 3.5-inch screen.) Compared to most phones at the time, the
Galaxy Note appeared absolutely massive. When it launched in
February 2013, critics blasted the Note for being too large. The
Wall Street Journal’s Walt Mossberg, one of the most famous tech
reviewers in the world,
compared using the Note to holding a piece of toast against your
ear.

Samsung's Galaxy Note
created the phablet market.AP

The initial reception was so
bad at first, sources say some US carriers almost didn’t want to
sell the Galaxy Note II the following year.

But the phone sold well outside
the US, especially in Asia, and eventually Samsung was able to
prove there was a market for phablets. Samsung’s phones kept
getting bigger and better screens, while iPhone users were stuck
with tiny devices.

A powerful narrative began to emerge in the press: Apple was in
trouble if it didn’t catch up with Samsung and start offering
phones with bigger screens. Many asked if Apple had lost its
knack for innovation following the death of Steve Jobs, and
Samsung was doing a good job at making that theory seem
plausible. Apple’s stock dropped as low as about $380 from its
all-time high of about $705, largely on fears that Apple didn’t
have a revolutionary new product up its sleeves.

Meanwhile, Samsung continued to climb. Sources familiar with
Samsung’s sales at the time said its marketing of the Galaxy S
line of phones had residual effects and boosted sales of
Samsung’s other products like washing machines and refrigerators.
In fact, the US team was outperforming Samsung’s headquarters in
South Korea, and other international offices were itching to
adopt “The Next Big Thing” in their respective countries.

The campaign was clearly a success. Unfortunately, not everyone at Samsung saw
it that way.

Missed opportunity

The success of Samsung’s Mobile in the US began a rift with the
Korean headquarters. Sources say the more successful Samsung was
in the US, the more complicated the relationship with
headquarters got. Instead of getting credit, the US team felt
they were being chastised for doing their jobs well. (Samsung
declined to comment on this story.)

It got so bad, a source told us, that Samsung flew a plane full
of executives to the mobile division’s office in Dallas for an
unannounced audit that lasted three weeks in 2012. The
Dallas-based employees had to go through all materials they used
to sell and market Samsung’s mobile products. They were accused
of falsifying sales, bribing the media, and a bunch of other
damaging actions that hurt morale in the office. The same
US-based office that helped turn Samsung into a brand as
recognizable as Apple was suddenly being punished for its work.

After three weeks, the Korean auditors found nothing wrong with
the way the US office had been operating and went home. But the
damage had been done, and the perception remained at the Korean
headquarters that despite its success, the US team was up to no
good.

In fact, during one meeting with the global teams at Samsung’s
headquarters in Korea, executives made the US team stand up in
front of several hundred of their peers in an auditorium. The
executives told the employees to clap for the US team as
encouragement since they were the only group failing the company,
even though it was clear to everyone the opposite was true.

That all but killed any hope of translating what the US team
pulled off to other regions. They were able to continue in North
America, but Samsung’s global messaging remained disjointed.

Amid these tensions, Samsung introduced the Galaxy S4 in 2013 at
an over-the-top event at Radio City Music Hall in New York.
Instead of the traditional product announcement, Samsung put on a
Broadway-style musical that incorporated features of the new
phone.

It was weird, one of those things you had to see to believe. And
a lot of people criticized Samsung for putting on a show that
seemed to objectify women.
CNET’s Molly Wood called the event “tone-deaf and shockingly
sexist.”

Aside from the awkward
unveiling, the Galaxy S4 also launched tomostly
negative reviews. Samsung
packed a ton of features into the phone like touch-free controls,
eye tracking, and a whole suite of camera modes that were either
unnecessary or didn’t work as advertised. Still, the phone was
Samsung’s most successful ever, and 2013 was another very good
year for the company.

But 2014 was going to be a wakeup call.

The rough year

At the Mobile World Congress in Barcelona last year, Samsung
boasted it had sold more than 100 million units from its Galaxy S
line over the last four years, a sales figure for a flagship
series that only Apple could beat.

Then it unveiled the Galaxy S5, a phone that toned down a lot of
the superfluous features of the Galaxy S4 while including some
useful new stuff like an improved camera and water-resistant
body. Like previous Galaxy S phones, the S5 had a plastic body
and sold for about $650 unlocked. Based on the success of the
Galaxy S4, the company had no reason to believe it had a dud on
its hands.

It was wrong.

There were a lot of factors for Samsung’s major slip in 2014, but
the biggest culprit appears to be Chinese smartphone
manufacturers. Chinese companies like the startups OnePlus and
Xiaomi appeared to have perfected the magic formula for making
beautiful, high-quality smartphones that cost at least half as
much as the iPhone or Samsung’s Galaxy S series.

Xiaomi was the biggest success story of the year. By some
estimates, it was the top smartphone vendor in China, the next
big market where millions of people are making the transition to
smartphones. Xiaomi’s phones are made out of premium materials
like metal, so they look better than Samsung’s phones. They also
have similar specs like fast processors, sharp screens, and
high-quality cameras.

Xiaomi CEO Lei Jun. Xiaomi
was the top smartphone vendor in China in
2014.AP

Xiaomi’s rise meant Samsung’s
decline in China. Since Xiaomi phones are also Android phones,
there was very little Samsung’s pricier models could do that
Xiaomi’s phones couldn’t do. Plus, Xiaomi is a marketing success
story. Fans snap up the devices with the same fervor Apple fans
buy new iPhone models in Western countries. And most of Xiaomi’s
marketing is done through social media or word of mouth, so it
doesn’t have to rely on the multimillion dollar ad campaigns
Samsung uses.

But Xiaomi is just one factor. A lot of Samsung’s success came
because it was able to get a head start and distribute its phones
on a broader scale before the rest of the non-iPhone competition
could, according to tech analyst Ben Thompson,
the author of the
Stratechery blog.

For example, the iPhone was only available on about a third as
many carriers as Samsung phones were. In the US, Samsung phones
were one of your best options unless you were an AT&T
customer and had access to the iPhone.

It was the same story on China Mobile, the largest wireless
carrier in the world with over 700 million subscribers. Apple
finally brought the iPhone to China Mobile early last year. Ever
since, China has been one of Apple’s biggest growth areas for the
iPhone business. Everyone else seemed to be choosing Xiaomi,
Lenovo, or another cheaper rival to Samsung.

“I think it’s always dangerous when you don’t know why you’ve
won,” Thompson said in an interview. “One of the reasons Samsung
succeeded is they pivoted in ways Nokia and others didn’t. They
were able to leverage everything they already had, but weren’t
able to sustain it because there wasn’t anything special about
their phones. Samsung got crushed on the high end by Apple and
the low end by Xiaomi in China.”

Thompson continued, “At the end of the day, there’s nothing to
differentiate a Samsung phone, so they’ll have to compete on
price.”

However, that doesn’t seem to be Samsung’s plan.

The new strategy

On March 1, Samsung will unveil two new versions of its next
flagship phone, the Galaxy S6.
According to sources familiar with Samsung’s plans, one
version will have a metal body, a departure from the plasticky
phones the company has made in the past. The second version will
have a curved screen, similar to the Galaxy Note Edge that
launched last fall.

But both models are still going to priced as premium products.
According to one leak, the “Edge” version of the Galaxy S6 could
cost over $1,000 without a contract, at least three times the
cost of a Xiaomi phone.

Unless Samsung has a special trick up its sleeve on the software
side, it’s unlikely that its new phones will be enough to justify
the extra cost over similar Android devices. And if that happens,
Samsung is almost certainly up for another messy year. The glow
surrounding Samsung’s smartphone business has almost certainly
faded for good. Time to find something new.

Samsung CEO BK Yoon at the
opening CES keynote.REUTERS/Rick
Wilking

That doesn’t mean the company
is hosed. Samsung is a massive organization that makes everything
from dishwashers to air purifiers. It has the scale and
manufacturing power to harness the next big thing after
smartphones, even if that next big thing doesn’t come from it’s
own R&D labs.

One key area Samsung is focusing on in the near term is the
“internet of things”
(IoT) trend, which means connecting everyday objects like
light switches and toasters to the internet for a deeper level of
control. At the Consumer Electronics Show in January of this
year, Samsung announced that every product it makes will connect
to the internet within a few years. In theory, this will build a
valuable ecosystem connecting everything in your home and create
a whole new category of Samsung customers.

Still, the company may always look back longingly on those brief
years when it went head-to-head with Apple.